The Pros and Cons of Buying Pre-Construction

When buying a home, one of the many choices you’ll have to make – in addition to budget, home size, location, type of mortgage, and the like – is whether or not to buy a pre-construction or a resale property. In city centres like Toronto, buying pre-construction is all the rage, as land is severely limited, available homes for sale are growing farther and fewer between, and developers rush to keep up with the demand for housing units.

If you’re a prospective homebuyer, purchasing a pre-construction can seem attractive for many reasons. One of those reasons may be the price tag, which is often at a much more attractive entry point for first-time buyers. Another reason to go for pre-construction is to avoid the often exhausting, frustrating, and disheartening process of bidding on a home and negotiating with a seller.

But buying before something is built has its own set of concerns.

The Cons of Buying on Concept

Jamie Harnish, a representative with Bosley Real Estate, cautions buyers that although the concept of buying a pre-construction condo from plans is simple in theory, there could be mitigating factors that complicate the issue. One thing to consider is the timeline from the time you buy the home to the time you move in, which can range anywhere from a year to three years (or more), and there’s no way of knowing exactly how long that will be.

“Who can predict where their life is going to be at that time?” Harnish asks. “If you’re a single person, you buy a one bedroom. Two years later, two and a half years later, you’re married and have got a kid on the way. A one bedroom’s not appropriate. So then, after that, then do you sell? Do you keep? There’s all kinds of different options, but ultimately what you purchased isn’t suitable for you anymore and there are lots of implications, including tax implications.”

Planning Ahead

A long lead time might work to your advantage if you’re fairly young and are still living at home, or if you’re still in university and your parents are helping you to purchase a place now for when you graduate. Even if you don’t fall into those categories, if your circumstances change drastically between your purchase and your move-in date, you may also have the option to sell the assignment to your unit; this means that you can sell your paperwork to another buyer (you can’t sell the unit itself because your name isn’t actually on the title until the building has been registered). And if you plan on keeping the unit and using it as an investment property down the road, it doesn’t matter so much if your life situation changes and you need to find another living situation to meet your needs. Having the option of getting your ducks in a row before you move is an option that pre-construction affords as opposed to a resale property, which rarely has closings longer than a few months.

You’ll Pay More Up Front

You may also think that the long lead time gives you a chance to save up some more money to put toward the unit, but that’s not the case. Although your mortgage lender only requires you to put down five per cent if the purchase price of the property is less than $500,000 (and 10 per cent on any amount between $500,000 and $999,999), the deposit required from the builder could be much more– something that may be an unexpected surprise.

“Repeat buyers may have the ability to put a little bit more money to put toward the purchase because they’re selling something, because they’ve built up some equity in a product,” Harnish says. “Most builders will want up to 20 per cent, could be more, structured over a period of time.”

So, for example, a buyer might have to pay five per cent within the first 30 days of signing the contract, and then another five per cent in the 90 days following, and then another five per cent 120 days after that. So by the time you’ve actually gotten into the unit, you will have put down 20 per cent or more as a down payment – an amount that would only apply for a home over a million dollars if it were a resale property.

“It’s not a matter of being able to scrape it together over time; it’s a larger number, period.”

Keep an Eye Out for Hidden Fees

Another thing to watch out for are the hidden fees. While the listed price points make pre-construction a viable option in areas where resale home prices are through the roof, many inexperienced buyers are unprepared for the costs that pop up along the way. Apart from the hefty deposit that may be required, and an assignment clause, which gives you the option to sell the papers to your unit, you also may encounter development charges and the costs for any upgrades that you choose for your unit. Upgrades can be rolled into the mortgage, so often people think that those prices are insignificant, but they can really add up.

“To be quite honest, I think it often comes down to money, and what their situation is,” Harnish says of buyers. “Pre-construction can be cheaper, at least that initial price tag – although not as much anymore – but certainly the advertised prices are less than what resale prices are going to be. I think that once people get further into a pre-construction deal they’re realizing that the numbers are starting to add up and . . . it’s not as straightforward as buying a place for $299,000.”

What You See May Not Be What You Get

And, he warns, it can be more costly in the end in more ways than one. You don’t get the opportunity to see, to touch, to experience your unit because it doesn’t exist yet. You’re buying something on paper, and the builder usually reserves the right to make some changes to your unit – some with and some without your consent. So what you end up with could be different from what you actually purchased.

Keeping all that in mind, you may still want to buy a pre-construction home for something else that it offers: a clean slate. You’re not inheriting anyone else’s headaches or shoddy repairs. Many people, Harnish says, just love things that are shiny and new, and that includes homes that have never been lived in, with appliances that have never been used, and finishes that you’re able to select based on your personal taste. And for all the people who are seeking the character and charm of an older build that they can experience right away, other buyers want convenience and amenities, and are willing to take a bit more of a risk for the benefits that they value more.

“Don’t get me wrong, people still buy pre-construction,” Harnish says. “I just think it’s important that everybody have a sound understanding of what they’re getting themselves into. And it’s knowing these things and getting these things across to them that can sometimes make or break their decision.”

Search the blog

Archive by Month

Categories

Popular Cities

About Zoocasa

Zoocasa is a full-service brokerage that makes buying and selling your home smarter and faster.
Our in-house agents have been recruited for their professional experience and notable track
records and will lead you through your purchase or sale, negotiate to get you the best value,
and educate you on everything from the transaction process to selecting the right neighbourhood.

Not intended to solicit buyers and sellers currently under contract.MLS®, REALTOR®, and the associated logos are trademarks of the Canadian Real Estate Association.Zoocasa™ and related brands are trademarks of Zoocasa Realty Inc. All other brand names and logos are trademarks of their respective owners.